Business context and reporting period
Issuer clarification: The supplied filing is j2 Global, Inc.’s Form 10-Q for the quarter ended March 31, 2013, not a standalone Ziff Davis, Inc. filing. Ziff Davis is a consolidated subsidiary and j2 Global’s Digital Media segment includes Ziff Davis and IGN Entertainment. The filing compares the three months ended March 31, 2013 with the same 2012 period; balance-sheet comparisons are with December 31, 2012.
j2 Global provides Business Cloud Services, including Internet fax and messaging, and Digital Media services, including online content and targeted advertising. Ziff Davis was acquired in November 2012; it acquired IGN in February 2013.
Financial performance and liquidity
- Revenue: $113.6 million, up 31% from $86.7 million. Business Cloud Services revenue was $90.7 million, up 4.7%; Digital Media contributed $22.9 million, with no comparable 2012 segment.
- Profit and margins: Gross profit was $93.4 million (about 82.2% of revenue), versus $70.8 million (about 81.7%). Operating income fell to $33.0 million from $37.6 million; operating margin was about 29.0%, versus 43.4%. Net income attributable to j2 Global shareholders was $22.9 million, versus $28.5 million. Diluted EPS was $0.49, versus $0.60.
- Segment results: Business Cloud Services operating income was $44.7 million, up 1.2%. Digital Media reported an operating loss of $4.0 million. Management attributed the overall increase in revenue principally to acquisitions and subscriber growth, while acquisition-related expenses and amortization contributed to higher operating expenses.
- Cash flow: Operating cash flow was $40.0 million, versus $38.9 million. Investing activities used $54.4 million, primarily reflecting acquisitions; financing activities used $10.4 million, mainly dividends. Cash and cash equivalents declined by $25.6 million to $193.1 million.
- Cash, investments and liquidity: Cash and short- and long-term investments totaled $310.1 million at March 31, down from $343.6 million at year-end. This included $20.4 million of restricted short-term investments. Management expected existing cash, short-term investments and operating cash flow to cover anticipated needs for at least the next 12 months.
- Debt: Long-term debt was $245.3 million, representing $250 million principal of 8.0% senior unsecured notes due in 2020, net of discount. Cash interest paid during the quarter was $10.3 million. The company reported compliance with note covenants and no borrowings under its revolving credit agreement.
- Other metrics: Business Cloud Services had 2.155 million paying telephone numbers, up from 2.025 million; quarterly ARPU was $12.98 versus $12.85, and cancel rate was 2.4% in both periods. The quarterly dividend paid was $0.2325 per share; the board subsequently declared $0.24 per share.
Material changes and unusual items
- Acquisitions closed in the quarter included IGN, MetroFax and smaller online backup businesses. Consideration was $90.6 million, net of cash acquired and including assumed liabilities; the acquisitions contributed $11.6 million of quarterly revenue. Purchase accounting remained provisional.
- Sales and marketing rose 99% to $29.6 million, research and development rose 50% to $6.7 million, and general and administrative expense rose 74% to $24.0 million. Management cited acquired operations, personnel and severance costs, increased advertising, and higher intangible amortization.
- Interest and other expense increased to $4.7 million from $0.7 million, primarily reflecting interest on the notes issued in July 2012, partly offset by foreign-exchange gains.
- Effective tax rate was 19.5%, down from 22.6%; management cited tax credits and other tax adjustments, partly offset by higher Subpart F income and changes in the geographic mix of earnings.
- After quarter-end, j2 Global announced a settlement with OpenText: a $27 million payment expected in the second quarter of 2013, patent licenses and dismissal of related litigation. The filing does not include this payment in first-quarter results.
Outlook, risks and contingencies
The filing provides no quantified revenue or earnings guidance. Management’s liquidity statement covers at least the next 12 months, but future dividends remain subject to board approval and debt-agreement restrictions. Risks highlighted include acquisition integration and realization of expected benefits, growth and customer retention, competition, international and currency exposure, debt service and covenants, taxes, regulatory requirements, cybersecurity and system reliability, and intellectual-property disputes. The company reported ongoing litigation and tax audits; it said an unfavorable legal outcome could materially affect an individual period, although it did not consider the disclosed proceedings likely to materially affect consolidated results overall based on current knowledge.
Important facts for investors to verify
- Confirm the issuer and scope: this is j2 Global’s consolidated 10-Q, with Ziff Davis reported as a subsidiary and Digital Media segment.
- Review acquisition-related costs, provisional purchase accounting, and the acquired businesses’ contribution to future revenue and profitability.
- Assess whether Business Cloud Services growth can offset Digital Media’s reported operating loss and the decline in consolidated operating income.
- Verify cash and investment availability, including restricted balances and foreign-held funds, alongside the notes’ interest, maturity and covenants.
- Track the timing and accounting for the $27 million OpenText settlement payment, and developments in litigation and tax audits.